2019 Report on Kaiwen Education
3/5/19
This paper reports on important recent developments at for-profit Beijing Kaiwen Dexin Education Technology Co., Ltd. (Kaiwen Education), using information from a variety of resources including company financial results from 2018 and its response to a second request for information from the China Securities Regulatory Commission (CSRC), a request prompted by Kaiwen’s desire to sell additional shares of company stock. https://www.rideraaup.net/kaiwen-announcement-11119.html
The paper begins with a summary that provides an overview of the company in 2019 and reports on significant new developments. A second section presents supplementary and important information on Kaiwen finances, business projections, industry position, and company operations.
Summary/Overview
In March 2019 Kaiwen Education remains a company in precarious financial condition. Applying the criteriadeveloped by Rider University's President and Board of Trustees to guide the selection of a future owner of Westminster Choir College, Kaiwen remains a most unsuitable choice.
The company and financial analysts in China predicted for-profit Kaiwen Education would end 2018 with another net loss, following significant net losses in each of the first three quarters of 2018. A Kaiwen Education “2018 performance report” that became publicly available on February 21, 2019 reveals a net loss for 2018 of 97.9 million Yuan (US $14.6 million) on company revenues of 250.2 million Yuan, a remarkable loss of 39%. Kaiwen’s revenue declined 59.6% from 2017, when much of its revenue was generated by the company’s previous steel fabricating business.
Since it acquired its first of two schools in 2016 the company has failed to generate a profit from its educational operations. Projections of student enrollment in both of Kaiwen's schools and profit have continually failed to materialize, and rightly reduce the credibility of current projections of future enrollments, revenue, and profits. Chinese government agencies continue to question the validity of Kaiwen's projections.
By all measures and by its own admission, Kaiwen education is a start-up organization in a crowded and competitive international education field in China whose future is uncertain.
Posing a notable risk to the private K-12 education industry in China and an additional risk to Kaiwen is an unsettled and evolving legal framework governing the establishment and operation of private K-12 schools, especially those that operate as for-profits (CSRC Report, pg. 9). Kaiwen itself acknowledges this risk (CSRC Report, pgs. 9, 74).
Recently and significantly, Kaiwen changed its strategic focus, in an attempt to improve its revenue and achieve profitability. Kaiwen Education's web site and statements by its Chairman in 2018 indicated that the company eventually planned to open additional K-12 schools in what it called "first-tier cities" in China. Recent company documents submitted to government authorities announce a new strategic direction.
Now and instead, because of limited financial resources (CSRC Report, pg. 12), Kaiwen Education seeks to open training centers in six China locations that offer extracurricular, non-compulsory, after-school, weekend, and summer-month classes for primarily 4-18 year olds. Kaiwen states: “The business of the company and its wholly-owned subsidiaries (that operate its schools) will not have significant reliance on the schools in the future” (CSRC Report, pg. 16). It believes that the market for such classes is large, though other organizations have already established themselves in this field and have considerably more expertise in many of the subjects Kaiwen plans to offer in its classes (CSRC Report, pgs. 42-44).
Consistent with its tendency in the past, with no centers open Kaiwen predicts robust enrollment, quick maturity, and high profit (30% annually) for this undertaking. It predicts that the centers will operate at 75% capacity in their second year and 100% capacity in their third year (CSRC Report, pg. 47).
To fund this endeavor, Kaiwen is seeking approval from the Chinese government for a non-public issuance of new shares of stock. Badachu Holdings, Kaiwen's largest shareholder, has committedto purchase at least 10% of this issue. Announced in Kaiwen's 2018 Semi-Annual Report, the goal is to raise 1 billion Yuan by issuing no more than 20% of the number of shares currently outstanding, or a maximum new issue of about 100,000 shares. Kaiwen's per share price has fallen precipitously (click on “1Y”) since the release of its 2018 Semi-annual Report last summer. Inthe early months of 2019Kaiwen’s stock recorded a succession of new 52-week lows in trading, evidence of investor pessimism about this company. As non-public new issues are often offered at a per share price less than market, with the current per share price at about 7.0 Yuan (about US $1) the yield from this issue, assuming it is approved, will be more than 30% less than the 1 billion Yuan goal.
China's government, through the China Securities Regulatory Commission, continues to express concerns and raise significant questions about the new stock issue. On behalf of shareholders it has asked Kaiwen on two occasions to provide additional information and to justify its projections of success for this new strategic initiative.
By its own admission its cautiousness and even skepticism arises because of its earlier approval in 2016 of an identical request from Kaiwen to raise funds from the sale of new shares (CSRC Report, pg. 66). The proceeds from this sale - 1.725 billion Yuan, of which 1.2 billion Yuan was used to fund the construction of Kaiwen's Chaoyang K-12 school - failed, and continues to fail, to generate the financial outcomes promised by Kaiwen. Enrollment at the Chaoyang school today is calculated at about 12% of capacity (CSRC Report, pg. 68 and http://www.chet51.com/rmxt/xiangqing5623729.html), thoughtheCSRC reports enrollment at only 7.32% of capacity (CSRC Report, pg. 24).
The CSRC reports that its cautiousness in evaluating Kaiwen’s request also arises because the company compares unfavorably with other organizations offering international K-12 education in Beijing and China (CSRC Report, pg. 72).
From Kaiwen’s response to the China Securities Regulatory Commission it is clear that Kaiwen has established a precedent of seeking reimbursement from each of its schools for the cost of land and building acquisition and school construction (CSRC Report, pg. 5, 6). This model applied to Westminster would burden the College and impose financial obligations likely impossible to satisfy without College liquidation. The survival of the College would be at risk.
It is important to note that despite Rider University's claim that Kaiwen Education is now entirely independent of its unsuccessful predecessor company, Jiangsu Zhongtai Bridge Steel Co., Ltd., Kaiwen through 2019 remains legally linked to this company, which was sold to others (Memorandum to the Rider University community from the Westminster Choir College Acquisition Corporation, August 8, 2018; and CSRC Report, pgs. 32-35).
Kaiwen is a guarantor of Jiangsu's performance on a series of outstanding Jiangsu contracts. Kaiwen's liability as a guarantor on June 30, 2018 totaled 915.2 million Yuan, then 43% of Kaiwen Education's net worth as a company, calculated by subtracting its total liabilities from its total assets. By the end of 2018 Jiangsu had completed projects and Kaiwen's liability as a guarantor had fallen to 303 million Yuan. Again, this liability will continue through 2019 (CSRC Report, pg. 35).
Supplementary Information
Kaiwen’s 2018 Net Loss
Previously reported was Kaiwen’s net loss for 2018 (39% of revenues) and a decline in revenue from 2017 of 59.6%. The company's net income for 2018 declined 520% from the year before, and earnings per share (EPS), a key metric for current and prospective shareholders, declined 500%, from .05 Yuan in 2017 to -.20 Yuan in 2018.http://data.eastmoney.com/notices/detail/002659/AN201902211298928331,JUU1JTg3JUFGJUU2JTk2JTg3JUU2JTk1JTk5JUU4JTgyJUIy.html
Earlier in 2018 Kaiwen had forecast for the year a net profit of 30 million Yuan and an EPS of .06 Yuan.
Kaiwen’s profit return on net equity in 2018- net equity is calculated by subtracting total company liabilities from total assets - fell from 2017’s low figure of 1.03% to -4.55% in 2018. The company today, then, is losing money on its net assets or investment.
Kaiwen claims that two factors are responsible for its projected net loss: high interest costs and an increase in the amount of depreciation and amortization required to be deducted from company revenue. An earlier report indicated that a high level of debt burdened the company with a sizable interest expense (“Kaiwen Education Technology Co., Ltd.: Performance Through the First Three Quarters of 2018”, November, 2018). Through the first three quarters of 2018 interest paid on debt consumed 14% of Kaiwen’s total revenues and was 28% of its operating expenses.
Concerning depreciation and amortization expenses, applying them is sound business practice, and they are typically predictable and regular costs of doing business. Kaiwen’s explanation of how this factor contributed to its reported 2018 net loss is not persuasive. Kaiwen claims that in 2017 depreciation was applied to its Chaoyang school and deducted from revenues only from mid-year on, once school construction was complete and the school was ready to be used. It claims that in 2018 depreciation was applied for the full year. Obviously, this was predictable and, indeed, this would be the case. This does not stand as a reason for 2018’s net loss.
Other factors significantly contributing to Kaiwen’s projected 2018 loss appear elsewhere in its current report to the China Securities Regulatory Commission and are suggested by other sources. These include: slow growth in enrollment in Kaiwen’s two K-12 schools (CSRC Report, pg. 67); its school tuition, the highestamong international K-12 schools in Beijing; and strong competition among the many K-12 international schools in Beijing (CSRC Report, pgs. 12, 74).
Kaiwen’s Projections
Kaiwen Education is clearly a company struggling to achieve a break-even point. Again, in its three years it has never made a profit from its educational operations.
Firms in this position are invariably optimistic about future prospects, so it is important that projections of their financial futures be carefully evaluated. Kaiwen offers financial projections to the China Securities Regulatory Commission (CSRC) to support its request to sell new shares of company stock. Kaiwen was required by the CSRC to provide and justify these projections as its past performance consistently and significantly fell short of previous projections provided to the agency (CSRC Report, pg. 68 and http://www.chet51.com/rmxt/xiangqing5623729.html).
Here, we evaluate a selection of Kaiwen’s current projections.
Projection of K-12 Enrollment Growth
Realistically and for some years going forward, enrollment in Kaiwen’s two international K-12 schools will continue to generate much – perhaps 80-90% - of the company’s revenue and be the major contributor to its profits. In its submission to the CSRC Kaiwen projects that the number of students in its schools will grow 500 to 900 students annually, until full enrollment is reached (CSRC Report, pg. 14). However, the two schools combined have not achieved anywhere near this enrollment growth in any year and this estimate is optimistic.
Kaiwen’s Beijing Haidian school, with a 1500 student capacity, enrolled 240 students in its first year, 2016 to 2017. Currently, in its third year, the school has about 500 students. This is an average annual enrollment growth of about 130 students per year.
The capacity of Kaiwen’s Beijing Chaoyang school is larger – 4100 students. Kaiwen predicted it would enroll 1780 students in its first school year, 2017-2018, but enrolled just 248 students (CSRC Report, pg. 67). Now in its second year, the school’s student enrollment is 475, an enrollment growth of 227 students (CSRC Report, pg. 67).
Historically, then, Kaiwen’s schools are adding about 350 to 360 students a year, less than the 500-900 students it projects it will add each year going forward.
When actual student enrollment is compared to school capacity, and considering both of Kaiwen’s schools together, Kaiwen’s overall school utilization rate currently is about 17% (975/ 5600). As reported earlier, enrollment at the Beijing Chaoyang school is only about 12% of capacity (CSRC Report, pg. 68 and http://www.chet51.com/rmxt/xiangqing5623729.html), thoughtheCSRC reports enrollment at only 7.32% of capacity (CSRC Report, pg. 24).
Projection of Company Revenue from Training Centers
With funds from a new non-public issuance of stock, not yet approved, Kaiwen seeks to open training centers in six China locations that will offer extracurricular, non-compulsory, after-school, weekend, and summer-month classes for primarily 4-18 year olds.
Though this initiative was announced in Kaiwen’s 2018 Semi-Annual Report issued in October 2018 and required approval from the CSRC, the company projects revenue from two of the centers this year (2019), from five of the centers next year, and from all six centers by the following year, 2021. The centers are projected to earn annual net profits from 2019 through 2021 of 13.7%, 31.4%, and 9.72% of total revenue, respectively; and approximately 30% of revenue in each of the years that follow (CSRC Report, 47, 48). The analysis on which this is based is very weak – consistent with other Kaiwen analyses we have seen - and would be judged to be inadequate as a business plan in undergraduate and graduate-level business programs. These projections of revenue, then, are highly uncertain.
The analysis, for example, fails to adequately explain and justify its assumptions; relies on national (i.e., China) rather than material city/locale-specific data; and ignores the critical assessment of established competitors with training centers in the six locations, competitors that have considerably more expertise in many of the subjects Kaiwen plans to offer in its classes.
Concerning the issue of expertise, Kaiwen’s answers to questions from the CSRC suggest that its competency and offerings in some of its key training center subject areas are only in an early stage of development. It states, for example, that “the company is showing good development momentum in the training field” (CSRC Report, pg. 10); and, “…in the field of art…(we) are gradually connecting with famous art (resources) at home and abroad…(and) in the field of music training the company is gradually achieving market-oriented operations” (CSRC Report, pg. 11); and, “Language training is gradually becoming an important source of income for the company (CSRC Report, pg. 13); and, “At present the company’s STEM (Science, Technology, Engineering, and Mathematics) education and training business is gradually being carried out “ (CSRC Report, pg. 11).
There are unreasonable earnings projections and errors pertinent to company revenue elsewhere in Kaiwen’s reply to the CSRC.
Kaiwen projects 50 million Yuan revenue from training in 2019, we assume from its new training centers; and from the extracurricular training it provides at its schools and camps, and to other K-12 schools. The company also states that revenue from training will grow by 50% annually (CSRC Report, pg. 14). Kaiwen bases these robust projections on what it claims was a 100% growth in training revenue in 2018. While a number for 2018 training revenue is not yet available, training revenue was 5.5 million Yuan for the first half of 2018 – through June 30. If we assume that training revenue for 2018 was double that and applied an annual growth rate of 50% to it, then projected training revenue for 2019 should be 16.5 million Yuan, not the 50 million Yuan Kaiwen forecasts.
Further, if we assume that training revenue in 2019 reached 50 million Yuan and grew 50% each year thereafter it would represent far less a percentage of Kaiwen’s total revenue than the company claims in its projections. In its reply to the CSRC Kaiwen states that for the two years, 2021 and 2022, training fee revenue will be 54.9% and 60.3% of total company revenue, respectively (CSRC Report, pg. 16). However, calculations using the 50 million Yuan figure for 2019, an annual growth rate of 50%, and the assumption that K-12 enrollment at Kaiwen’s schools will grow by 500 students each year result in much lower percentages – 19.2% (vs 54.9%) for 2021 and 22.7% (vs 60.3%) for 2022.
Kaiwen would want to report high percentages to the CSRC as evidence that its investment in training centers, made possible by the new stock issue, will produce significant returns and contribute to company stability.
Financial Obligations of Kaiwen’s Schools
Kaiwen’s response to the China Securities Regulatory Commission provides insight on the relationship and arrangements it may establish with Westminster Choir College. Of great concern would be an attempt by the company to impose on the College the contractual and financial obligations it has placed on its schools in China, obligations that are not present in U. S. higher education.
These arrangements, as they attach College revenue, would put the continuation of Westminster at risk and thus discourage student enrollment, staff hiring and retention, and alumni support.
Kaiwen’s two Beijing schools are operated by two wholly-owned subsidiaries: Kaiwen Zhixin operates the Beijing Haidian school and Wen Kaixing (aka Wenkaixing) operates the Beijing Chaoyang school. The schools are the core source of income for the wholly-owned subsidiaries and are “the main service targets” of Kaiwen Education (CSRC Report, pgs. 1, 2).
The subsidiaries were responsible for school acquisition and physical improvement (Haidian school) or obtaining land use rights and new school construction, at a cost of 2.3 billion Yuan or US $341 million (Chaoyang school). The subsidiaries have “House Lease Contracts” with the schools and charge the schools rent on a sliding scale based on school enrollment. No rent is charged when enrollment is low – at the Chaoyang school, for example, when enrollment is less than 1000 students. When enrollment exceeds that figure the subsidiaries charge the schools 40,000 Yuan per student annually, which is 20% of a student’s annual tuition payment (CSRC Report, pgs. 5, 6).
At close to full enrollment the subsidiaries seek a per-square foot revenue and annual rate of return on its real estate investment that matches the returns of nearby commercial properties. For the Chaoyang school, for example, the rental charge at close to full enrollment is 160 million Yuan or US $23.7 million annually, providing a payback period and return on investment of 14 years and 6.85%, respectively (CSRC Report, pgs. 5, 6).
Both subsidiaries provide various consulting, staffing, daily management, and other services to the schools for which fees are charged, through contracts like the “Exclusive Management Consulting Agreement”, “Sports Training Agreement”, and the “Study Services Agreement”. These and other offered services, including extracurricular offerings such as art training, camps, and events are identified as “profit points” by Kaiwen (CSRC Report, pgs. 2, 3).
At least two other Kaiwen Education subsidiaries, Kevin Ruixin and Kai Literature, also separately charge schools and parents for services, including supplemental, sometimes personalized, extracurricular services. Kai literature provides sports training and Kevin Ruixin is mainly involved in English-language instruction, study abroad counseling, and related work (CSRC Report, pg. 6, and http://www.chet51.com/rmxt/xiangqing5623729.html).
Collectively and in addition to rent, Kaiwen subsidiaries charge the schools at least an additional 45,000 Yuan per student annually, or at least an additional 22.5% of a student’s school tuition. Thus, and in sum, at least 42.5% of student tuition is acquired by wholly-owned Kaiwen Education subsidiaries (CSRC Report, pgs. 6, 7)
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Kaiwen’s 2018 Semi-annual Report also reported the following.In the first six months of 2018 Kaiwen Education purchased 12.3 million Yuan of goods and services for its schools from subsidiaries owned by its largest shareholder and controlling company, Badachu Holdings (4.2 million Yuan) or from organizations owned by one of the directors of Badachu (8.1 million Yuan - 65 % of the total) (pgs. 124, 125).In the United States, a board director profiting in some way from her/his position on a board, which exists at Badachu today, is widely prohibited on moral and legal grounds.
Kaiwen’s Competitive Standing
International schools in China consist of those that either work with children of foreigners who have work assignments in China or prepare Chinese youth to pursue college study abroad. In China in 2017 there were 126 children’s schools for foreigners, 367 private international schools, and 241 international public schools. In 2018, of the 85 international schools in Beijing, there are 21 international schools for foreigners, 42 private international schools, and 22 public international schools. Concerning the two Beijing districts where Kaiwen has a school, there are 20 international schools in the Haidian District and 30 in the Chaoyang District http://www.chet51.com/rmxt/xiangqing5623729.html.
Kaiwen characterizes the competition in this market as “increasingly fierce” (CSRC Report, pgs. 12, 74), and describes its education business as “still in the early stage of brand building and market development” (CSRC Report, pg. 13).
In its response to Kaiwen’s request to issue new shares, the CSRC notes that Kaiwen’s schools compare unfavorably with comparable schools in China offering international K-12 education, in such areas as “teacher strength, school utilization rate, teacher-student ratio, (and) teacher remuneration”. It characterizes the difference between Kaiwen and its competitors as “a large gap”, citing as competitors Maple Leaf Education, Boschle Education, Concord Education, and Chengshi Education (CSRC Report, pg. 72).
Also, Kaiwen’s Haidian K-12 school (“Kaiwen Academy”), the oldest of its two schools, now in its third year, ranked 25 out of 30 international K-12 international schools in Beijing in a 2018 in-depth study,a study focusing on schools placing a strong emphasis on AP, Advanced Level (England), and IB (International Baccalaureate) courses. Kaiwen's Haidian school's overall weighted score was 6.6 out of 10, using criteria that includedschool history and accomplishments, size and offerings, school climate, teacher-student ratio, and after-school activities. http://edu.sina.com.cn/ischool/2018-03-02/doc-ifyrzinh1448055.shtml
Kaiwen's two schools do not appear on three other lists - the best international K-12 schools in Beijing, the best international primary schools in Beijing, and the best international schools in China
.https://www.marketingtochina.com/top-international-schools-china-2017/ AND http://www.51guoji.com/beijing/xiaoxue/paiming/15054403518428.html AND http://www.sohu.com/a/238860797_100093677
The paper begins with a summary that provides an overview of the company in 2019 and reports on significant new developments. A second section presents supplementary and important information on Kaiwen finances, business projections, industry position, and company operations.
Summary/Overview
In March 2019 Kaiwen Education remains a company in precarious financial condition. Applying the criteriadeveloped by Rider University's President and Board of Trustees to guide the selection of a future owner of Westminster Choir College, Kaiwen remains a most unsuitable choice.
The company and financial analysts in China predicted for-profit Kaiwen Education would end 2018 with another net loss, following significant net losses in each of the first three quarters of 2018. A Kaiwen Education “2018 performance report” that became publicly available on February 21, 2019 reveals a net loss for 2018 of 97.9 million Yuan (US $14.6 million) on company revenues of 250.2 million Yuan, a remarkable loss of 39%. Kaiwen’s revenue declined 59.6% from 2017, when much of its revenue was generated by the company’s previous steel fabricating business.
Since it acquired its first of two schools in 2016 the company has failed to generate a profit from its educational operations. Projections of student enrollment in both of Kaiwen's schools and profit have continually failed to materialize, and rightly reduce the credibility of current projections of future enrollments, revenue, and profits. Chinese government agencies continue to question the validity of Kaiwen's projections.
By all measures and by its own admission, Kaiwen education is a start-up organization in a crowded and competitive international education field in China whose future is uncertain.
Posing a notable risk to the private K-12 education industry in China and an additional risk to Kaiwen is an unsettled and evolving legal framework governing the establishment and operation of private K-12 schools, especially those that operate as for-profits (CSRC Report, pg. 9). Kaiwen itself acknowledges this risk (CSRC Report, pgs. 9, 74).
Recently and significantly, Kaiwen changed its strategic focus, in an attempt to improve its revenue and achieve profitability. Kaiwen Education's web site and statements by its Chairman in 2018 indicated that the company eventually planned to open additional K-12 schools in what it called "first-tier cities" in China. Recent company documents submitted to government authorities announce a new strategic direction.
Now and instead, because of limited financial resources (CSRC Report, pg. 12), Kaiwen Education seeks to open training centers in six China locations that offer extracurricular, non-compulsory, after-school, weekend, and summer-month classes for primarily 4-18 year olds. Kaiwen states: “The business of the company and its wholly-owned subsidiaries (that operate its schools) will not have significant reliance on the schools in the future” (CSRC Report, pg. 16). It believes that the market for such classes is large, though other organizations have already established themselves in this field and have considerably more expertise in many of the subjects Kaiwen plans to offer in its classes (CSRC Report, pgs. 42-44).
Consistent with its tendency in the past, with no centers open Kaiwen predicts robust enrollment, quick maturity, and high profit (30% annually) for this undertaking. It predicts that the centers will operate at 75% capacity in their second year and 100% capacity in their third year (CSRC Report, pg. 47).
To fund this endeavor, Kaiwen is seeking approval from the Chinese government for a non-public issuance of new shares of stock. Badachu Holdings, Kaiwen's largest shareholder, has committedto purchase at least 10% of this issue. Announced in Kaiwen's 2018 Semi-Annual Report, the goal is to raise 1 billion Yuan by issuing no more than 20% of the number of shares currently outstanding, or a maximum new issue of about 100,000 shares. Kaiwen's per share price has fallen precipitously (click on “1Y”) since the release of its 2018 Semi-annual Report last summer. Inthe early months of 2019Kaiwen’s stock recorded a succession of new 52-week lows in trading, evidence of investor pessimism about this company. As non-public new issues are often offered at a per share price less than market, with the current per share price at about 7.0 Yuan (about US $1) the yield from this issue, assuming it is approved, will be more than 30% less than the 1 billion Yuan goal.
China's government, through the China Securities Regulatory Commission, continues to express concerns and raise significant questions about the new stock issue. On behalf of shareholders it has asked Kaiwen on two occasions to provide additional information and to justify its projections of success for this new strategic initiative.
By its own admission its cautiousness and even skepticism arises because of its earlier approval in 2016 of an identical request from Kaiwen to raise funds from the sale of new shares (CSRC Report, pg. 66). The proceeds from this sale - 1.725 billion Yuan, of which 1.2 billion Yuan was used to fund the construction of Kaiwen's Chaoyang K-12 school - failed, and continues to fail, to generate the financial outcomes promised by Kaiwen. Enrollment at the Chaoyang school today is calculated at about 12% of capacity (CSRC Report, pg. 68 and http://www.chet51.com/rmxt/xiangqing5623729.html), thoughtheCSRC reports enrollment at only 7.32% of capacity (CSRC Report, pg. 24).
The CSRC reports that its cautiousness in evaluating Kaiwen’s request also arises because the company compares unfavorably with other organizations offering international K-12 education in Beijing and China (CSRC Report, pg. 72).
From Kaiwen’s response to the China Securities Regulatory Commission it is clear that Kaiwen has established a precedent of seeking reimbursement from each of its schools for the cost of land and building acquisition and school construction (CSRC Report, pg. 5, 6). This model applied to Westminster would burden the College and impose financial obligations likely impossible to satisfy without College liquidation. The survival of the College would be at risk.
It is important to note that despite Rider University's claim that Kaiwen Education is now entirely independent of its unsuccessful predecessor company, Jiangsu Zhongtai Bridge Steel Co., Ltd., Kaiwen through 2019 remains legally linked to this company, which was sold to others (Memorandum to the Rider University community from the Westminster Choir College Acquisition Corporation, August 8, 2018; and CSRC Report, pgs. 32-35).
Kaiwen is a guarantor of Jiangsu's performance on a series of outstanding Jiangsu contracts. Kaiwen's liability as a guarantor on June 30, 2018 totaled 915.2 million Yuan, then 43% of Kaiwen Education's net worth as a company, calculated by subtracting its total liabilities from its total assets. By the end of 2018 Jiangsu had completed projects and Kaiwen's liability as a guarantor had fallen to 303 million Yuan. Again, this liability will continue through 2019 (CSRC Report, pg. 35).
Supplementary Information
Kaiwen’s 2018 Net Loss
Previously reported was Kaiwen’s net loss for 2018 (39% of revenues) and a decline in revenue from 2017 of 59.6%. The company's net income for 2018 declined 520% from the year before, and earnings per share (EPS), a key metric for current and prospective shareholders, declined 500%, from .05 Yuan in 2017 to -.20 Yuan in 2018.http://data.eastmoney.com/notices/detail/002659/AN201902211298928331,JUU1JTg3JUFGJUU2JTk2JTg3JUU2JTk1JTk5JUU4JTgyJUIy.html
Earlier in 2018 Kaiwen had forecast for the year a net profit of 30 million Yuan and an EPS of .06 Yuan.
Kaiwen’s profit return on net equity in 2018- net equity is calculated by subtracting total company liabilities from total assets - fell from 2017’s low figure of 1.03% to -4.55% in 2018. The company today, then, is losing money on its net assets or investment.
Kaiwen claims that two factors are responsible for its projected net loss: high interest costs and an increase in the amount of depreciation and amortization required to be deducted from company revenue. An earlier report indicated that a high level of debt burdened the company with a sizable interest expense (“Kaiwen Education Technology Co., Ltd.: Performance Through the First Three Quarters of 2018”, November, 2018). Through the first three quarters of 2018 interest paid on debt consumed 14% of Kaiwen’s total revenues and was 28% of its operating expenses.
Concerning depreciation and amortization expenses, applying them is sound business practice, and they are typically predictable and regular costs of doing business. Kaiwen’s explanation of how this factor contributed to its reported 2018 net loss is not persuasive. Kaiwen claims that in 2017 depreciation was applied to its Chaoyang school and deducted from revenues only from mid-year on, once school construction was complete and the school was ready to be used. It claims that in 2018 depreciation was applied for the full year. Obviously, this was predictable and, indeed, this would be the case. This does not stand as a reason for 2018’s net loss.
Other factors significantly contributing to Kaiwen’s projected 2018 loss appear elsewhere in its current report to the China Securities Regulatory Commission and are suggested by other sources. These include: slow growth in enrollment in Kaiwen’s two K-12 schools (CSRC Report, pg. 67); its school tuition, the highestamong international K-12 schools in Beijing; and strong competition among the many K-12 international schools in Beijing (CSRC Report, pgs. 12, 74).
Kaiwen’s Projections
Kaiwen Education is clearly a company struggling to achieve a break-even point. Again, in its three years it has never made a profit from its educational operations.
Firms in this position are invariably optimistic about future prospects, so it is important that projections of their financial futures be carefully evaluated. Kaiwen offers financial projections to the China Securities Regulatory Commission (CSRC) to support its request to sell new shares of company stock. Kaiwen was required by the CSRC to provide and justify these projections as its past performance consistently and significantly fell short of previous projections provided to the agency (CSRC Report, pg. 68 and http://www.chet51.com/rmxt/xiangqing5623729.html).
Here, we evaluate a selection of Kaiwen’s current projections.
Projection of K-12 Enrollment Growth
Realistically and for some years going forward, enrollment in Kaiwen’s two international K-12 schools will continue to generate much – perhaps 80-90% - of the company’s revenue and be the major contributor to its profits. In its submission to the CSRC Kaiwen projects that the number of students in its schools will grow 500 to 900 students annually, until full enrollment is reached (CSRC Report, pg. 14). However, the two schools combined have not achieved anywhere near this enrollment growth in any year and this estimate is optimistic.
Kaiwen’s Beijing Haidian school, with a 1500 student capacity, enrolled 240 students in its first year, 2016 to 2017. Currently, in its third year, the school has about 500 students. This is an average annual enrollment growth of about 130 students per year.
The capacity of Kaiwen’s Beijing Chaoyang school is larger – 4100 students. Kaiwen predicted it would enroll 1780 students in its first school year, 2017-2018, but enrolled just 248 students (CSRC Report, pg. 67). Now in its second year, the school’s student enrollment is 475, an enrollment growth of 227 students (CSRC Report, pg. 67).
Historically, then, Kaiwen’s schools are adding about 350 to 360 students a year, less than the 500-900 students it projects it will add each year going forward.
When actual student enrollment is compared to school capacity, and considering both of Kaiwen’s schools together, Kaiwen’s overall school utilization rate currently is about 17% (975/ 5600). As reported earlier, enrollment at the Beijing Chaoyang school is only about 12% of capacity (CSRC Report, pg. 68 and http://www.chet51.com/rmxt/xiangqing5623729.html), thoughtheCSRC reports enrollment at only 7.32% of capacity (CSRC Report, pg. 24).
Projection of Company Revenue from Training Centers
With funds from a new non-public issuance of stock, not yet approved, Kaiwen seeks to open training centers in six China locations that will offer extracurricular, non-compulsory, after-school, weekend, and summer-month classes for primarily 4-18 year olds.
Though this initiative was announced in Kaiwen’s 2018 Semi-Annual Report issued in October 2018 and required approval from the CSRC, the company projects revenue from two of the centers this year (2019), from five of the centers next year, and from all six centers by the following year, 2021. The centers are projected to earn annual net profits from 2019 through 2021 of 13.7%, 31.4%, and 9.72% of total revenue, respectively; and approximately 30% of revenue in each of the years that follow (CSRC Report, 47, 48). The analysis on which this is based is very weak – consistent with other Kaiwen analyses we have seen - and would be judged to be inadequate as a business plan in undergraduate and graduate-level business programs. These projections of revenue, then, are highly uncertain.
The analysis, for example, fails to adequately explain and justify its assumptions; relies on national (i.e., China) rather than material city/locale-specific data; and ignores the critical assessment of established competitors with training centers in the six locations, competitors that have considerably more expertise in many of the subjects Kaiwen plans to offer in its classes.
Concerning the issue of expertise, Kaiwen’s answers to questions from the CSRC suggest that its competency and offerings in some of its key training center subject areas are only in an early stage of development. It states, for example, that “the company is showing good development momentum in the training field” (CSRC Report, pg. 10); and, “…in the field of art…(we) are gradually connecting with famous art (resources) at home and abroad…(and) in the field of music training the company is gradually achieving market-oriented operations” (CSRC Report, pg. 11); and, “Language training is gradually becoming an important source of income for the company (CSRC Report, pg. 13); and, “At present the company’s STEM (Science, Technology, Engineering, and Mathematics) education and training business is gradually being carried out “ (CSRC Report, pg. 11).
There are unreasonable earnings projections and errors pertinent to company revenue elsewhere in Kaiwen’s reply to the CSRC.
Kaiwen projects 50 million Yuan revenue from training in 2019, we assume from its new training centers; and from the extracurricular training it provides at its schools and camps, and to other K-12 schools. The company also states that revenue from training will grow by 50% annually (CSRC Report, pg. 14). Kaiwen bases these robust projections on what it claims was a 100% growth in training revenue in 2018. While a number for 2018 training revenue is not yet available, training revenue was 5.5 million Yuan for the first half of 2018 – through June 30. If we assume that training revenue for 2018 was double that and applied an annual growth rate of 50% to it, then projected training revenue for 2019 should be 16.5 million Yuan, not the 50 million Yuan Kaiwen forecasts.
Further, if we assume that training revenue in 2019 reached 50 million Yuan and grew 50% each year thereafter it would represent far less a percentage of Kaiwen’s total revenue than the company claims in its projections. In its reply to the CSRC Kaiwen states that for the two years, 2021 and 2022, training fee revenue will be 54.9% and 60.3% of total company revenue, respectively (CSRC Report, pg. 16). However, calculations using the 50 million Yuan figure for 2019, an annual growth rate of 50%, and the assumption that K-12 enrollment at Kaiwen’s schools will grow by 500 students each year result in much lower percentages – 19.2% (vs 54.9%) for 2021 and 22.7% (vs 60.3%) for 2022.
Kaiwen would want to report high percentages to the CSRC as evidence that its investment in training centers, made possible by the new stock issue, will produce significant returns and contribute to company stability.
Financial Obligations of Kaiwen’s Schools
Kaiwen’s response to the China Securities Regulatory Commission provides insight on the relationship and arrangements it may establish with Westminster Choir College. Of great concern would be an attempt by the company to impose on the College the contractual and financial obligations it has placed on its schools in China, obligations that are not present in U. S. higher education.
These arrangements, as they attach College revenue, would put the continuation of Westminster at risk and thus discourage student enrollment, staff hiring and retention, and alumni support.
Kaiwen’s two Beijing schools are operated by two wholly-owned subsidiaries: Kaiwen Zhixin operates the Beijing Haidian school and Wen Kaixing (aka Wenkaixing) operates the Beijing Chaoyang school. The schools are the core source of income for the wholly-owned subsidiaries and are “the main service targets” of Kaiwen Education (CSRC Report, pgs. 1, 2).
The subsidiaries were responsible for school acquisition and physical improvement (Haidian school) or obtaining land use rights and new school construction, at a cost of 2.3 billion Yuan or US $341 million (Chaoyang school). The subsidiaries have “House Lease Contracts” with the schools and charge the schools rent on a sliding scale based on school enrollment. No rent is charged when enrollment is low – at the Chaoyang school, for example, when enrollment is less than 1000 students. When enrollment exceeds that figure the subsidiaries charge the schools 40,000 Yuan per student annually, which is 20% of a student’s annual tuition payment (CSRC Report, pgs. 5, 6).
At close to full enrollment the subsidiaries seek a per-square foot revenue and annual rate of return on its real estate investment that matches the returns of nearby commercial properties. For the Chaoyang school, for example, the rental charge at close to full enrollment is 160 million Yuan or US $23.7 million annually, providing a payback period and return on investment of 14 years and 6.85%, respectively (CSRC Report, pgs. 5, 6).
Both subsidiaries provide various consulting, staffing, daily management, and other services to the schools for which fees are charged, through contracts like the “Exclusive Management Consulting Agreement”, “Sports Training Agreement”, and the “Study Services Agreement”. These and other offered services, including extracurricular offerings such as art training, camps, and events are identified as “profit points” by Kaiwen (CSRC Report, pgs. 2, 3).
At least two other Kaiwen Education subsidiaries, Kevin Ruixin and Kai Literature, also separately charge schools and parents for services, including supplemental, sometimes personalized, extracurricular services. Kai literature provides sports training and Kevin Ruixin is mainly involved in English-language instruction, study abroad counseling, and related work (CSRC Report, pg. 6, and http://www.chet51.com/rmxt/xiangqing5623729.html).
Collectively and in addition to rent, Kaiwen subsidiaries charge the schools at least an additional 45,000 Yuan per student annually, or at least an additional 22.5% of a student’s school tuition. Thus, and in sum, at least 42.5% of student tuition is acquired by wholly-owned Kaiwen Education subsidiaries (CSRC Report, pgs. 6, 7)
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Kaiwen’s 2018 Semi-annual Report also reported the following.In the first six months of 2018 Kaiwen Education purchased 12.3 million Yuan of goods and services for its schools from subsidiaries owned by its largest shareholder and controlling company, Badachu Holdings (4.2 million Yuan) or from organizations owned by one of the directors of Badachu (8.1 million Yuan - 65 % of the total) (pgs. 124, 125).In the United States, a board director profiting in some way from her/his position on a board, which exists at Badachu today, is widely prohibited on moral and legal grounds.
Kaiwen’s Competitive Standing
International schools in China consist of those that either work with children of foreigners who have work assignments in China or prepare Chinese youth to pursue college study abroad. In China in 2017 there were 126 children’s schools for foreigners, 367 private international schools, and 241 international public schools. In 2018, of the 85 international schools in Beijing, there are 21 international schools for foreigners, 42 private international schools, and 22 public international schools. Concerning the two Beijing districts where Kaiwen has a school, there are 20 international schools in the Haidian District and 30 in the Chaoyang District http://www.chet51.com/rmxt/xiangqing5623729.html.
Kaiwen characterizes the competition in this market as “increasingly fierce” (CSRC Report, pgs. 12, 74), and describes its education business as “still in the early stage of brand building and market development” (CSRC Report, pg. 13).
In its response to Kaiwen’s request to issue new shares, the CSRC notes that Kaiwen’s schools compare unfavorably with comparable schools in China offering international K-12 education, in such areas as “teacher strength, school utilization rate, teacher-student ratio, (and) teacher remuneration”. It characterizes the difference between Kaiwen and its competitors as “a large gap”, citing as competitors Maple Leaf Education, Boschle Education, Concord Education, and Chengshi Education (CSRC Report, pg. 72).
Also, Kaiwen’s Haidian K-12 school (“Kaiwen Academy”), the oldest of its two schools, now in its third year, ranked 25 out of 30 international K-12 international schools in Beijing in a 2018 in-depth study,a study focusing on schools placing a strong emphasis on AP, Advanced Level (England), and IB (International Baccalaureate) courses. Kaiwen's Haidian school's overall weighted score was 6.6 out of 10, using criteria that includedschool history and accomplishments, size and offerings, school climate, teacher-student ratio, and after-school activities. http://edu.sina.com.cn/ischool/2018-03-02/doc-ifyrzinh1448055.shtml
Kaiwen's two schools do not appear on three other lists - the best international K-12 schools in Beijing, the best international primary schools in Beijing, and the best international schools in China
.https://www.marketingtochina.com/top-international-schools-china-2017/ AND http://www.51guoji.com/beijing/xiaoxue/paiming/15054403518428.html AND http://www.sohu.com/a/238860797_100093677
For more information on Westminster Choir College and Kaiwen, see www.rideraaup.net/saving-wcc.html